Seagate Technology plc — Form 10-Q summary
Business context and reporting period
Seagate supplies data-storage products, principally hard disk drives (HDDs), along with SSDs and storage systems. This filing covers the fiscal third quarter ended April 3, 2020, and the first nine months of fiscal 2020. The quarter was 13 weeks; the nine-month period was 40 weeks, compared with 39 weeks in the prior-year period.
Financial performance and liquidity
| Metric | Q3 FY2020 | Q3 FY2019 | Nine months FY2020 | Nine months FY2019 |
|---|---|---|---|---|
| Revenue | $2,718 million | $2,313 million | $7,992 million | $8,019 million |
| Gross margin | 27% | 26% | 27% | 29% |
| Operating income | $376 million | $236 million | $1,033 million | $1,155 million |
| Net income | $320 million | $195 million | $838 million | $1,029 million |
| Diluted EPS | $1.22 | $0.69 | $3.15 | $3.57 |
- Q3 operating cash flow was $390 million; for the nine months it was $1.326 billion. Nine-month capital expenditures were $471 million.
- Cash and cash equivalents were $1.612 billion at April 3, 2020, down $608 million from June 28, 2019. Current assets were $4.015 billion and current liabilities $2.690 billion.
- Debt was approximately $4.1 billion, net of issuance costs. The $1.5 billion revolving credit facility was undrawn. Seagate reported compliance with its debt covenants and expected to remain compliant for the next 12 months.
- Nine-month financing cash uses included $795 million for share repurchases, $505 million for dividends and $685 million for debt redemptions and repurchases; $498 million of term-loan proceeds partly offset these uses.
Changes versus comparable periods
- Q3 revenue rose 18% year over year, driven mainly by higher mass-capacity HDD shipments. Seagate shipped 120 exabytes, versus 77 exabytes a year earlier; mass-capacity shipments rose to 91 from 43 exabytes. HDD price per terabyte declined to $21 from $28.
- Q3 gross margin improved year over year, but declined from 28% in the December 2019 quarter to 27%. Management cited price erosion, higher logistics costs and COVID-related factory under-utilization, partly offset by product mix.
- Nine-month revenue was nearly flat year over year, while net income declined to $838 million from $1.029 billion. The filing attributes the revenue trend primarily to price erosion partly offset by increased mass-capacity shipments. Prior-year results also included non-recurring income related to Seagate’s former Toshiba Memory investment.
- A change in estimated useful lives for certain manufacturing equipment reduced depreciation and increased Q3 net income by $38 million and nine-month net income by $103 million; diluted EPS increased by $0.14 and $0.39, respectively.
Outlook, risks, contingencies and unusual items
- COVID-19 had caused supply-chain and demand disruptions, factory under-utilization, and higher logistics and operating costs. Management expected some disruptions to continue into fiscal Q4 and said the overall impact remained uncertain.
- Management said available cash, operating cash generation and borrowing capacity should meet cash needs for the next 12 months, while noting the rapidly evolving uncertainty related to COVID-19. Fiscal 2020 capital expenditures were expected to be at or below the long-term target of 6%–8% of revenue.
- The board declared a $0.65-per-share dividend on April 21, payable July 8, 2020. The company reported $1.3 billion remaining under its share-repurchase authorization at quarter-end.
- Key risks include pandemic-related manufacturing, supplier and customer disruption; concentrated or limited-source component supply; demand and pricing pressure; international, currency and trade risks; debt and covenant compliance; and privacy, cybersecurity and regulatory exposure.
- Seagate disclosed ongoing patent litigation, including Convolve/MIT, for which it could not reasonably estimate a loss range, and Lambeth, for which it estimated any loss would be immaterial. Seagate also brought an antitrust and contract action against HDD suspension-assembly suppliers; the filing provides no claimed recovery amount.
Investor facts to verify
- How COVID-19 affected subsequent-quarter demand, production, supply availability and costs, and whether the expected disruptions persisted.
- Whether mass-capacity shipment growth and product mix could offset continuing HDD price erosion.
- Cash generation, working-capital movements, capital spending and capacity to sustain dividends and repurchases while managing approximately $4.1 billion of debt.
- The earnings and EPS contribution from the longer manufacturing-equipment useful-life estimates, and whether the revised estimates remain supportable.
- Developments in the disclosed litigation and supplier claims, including any change in potential exposure or recoveries.